Buying Cars

I like cars, and aside from a home a car is the biggest purchase most of us will make.  Here’s my ideal and realistic car ownership life cycle: buy a certified pre-owned car, get a five year financing, plan to keep the car for seven to eight years, and repeat.

I never consider buying a new car.  However, I am risk averse, so I want as much comfort that the car is going to last and I won’t be paying a mechanic a lot of cash at random intervals to keep me on the road.  I can’t deal with that uncertainty, and I don’t like uneven expenses.  My solution is to buy certified pre-owned cars from manufactures with good reputations and cars with low mileage.  For research, I’ve used Edmunds for the past 7 or 8 years.  So here’s my reasoning on CPO cars. 

Depreciation, the car’s loss of value over time, is greatest in whole dollar terms in the early years.  Let someone else take those losses in value.  You’re going to lose too, but I’m not comfortable with throwing that much value away.

Have a trade in and a cash-down payment.  If you really want the car, it’s worth putting more cash down upfront for a lower payment over the next five years.  One, you’ll save on interest expense, and two you’ll be glad you have a lower payment in years 3, 4, and 5 after the “newness” wears off.  Not to mention, if you loose a job, not having a big car payment will help. 

To get that cash down payment, never stop making car payments.  When the car’s paid off, put those car payments in savings.  Now, you’ve got the cash for surprise repairs or expensive maintenance as well as building that new cash down payment.  When you buy the new car, as far as your budget’s concerned, nothings changed.

For the financing, always get your self pre-approved with a lender before going to the dealership.  You’ll get the facts about your credit and you’ll know if the financing being offered is a good deal.  As a side note, get your credit as clean as possible; it will open doors to better deals. 

As a final note on cars, the Car Talk guys on NPR have said as much, “You can pay for a new car in car payments or for an old car in repairs & maintenance.  Either way you’re going to pay.”  I prefer my car costs to be as straight line and predictable as possible.

Savings and Investing: Getting Started

For savings, I like having money in buckets.  I’ve got immediate savings at the bank in a savings account and I’ve got money at an online broker.  The savings account money is just cash; it’s the money I may need to fix the car, pay a medical bill, payoff the credit bill if we overspent that month, etc.  The money at the online broker is for longer term goals and is invested in as easy and straight forward a way as possible: five to six index funds, which really could be two or three.

There are two things I want to discuss here: asset allocation and dollar cost averaging.

Asset allocation is process of dividing up the money you have to invest into asset classes, such as stocks, bonds, cash, commodities, and other investment vehicles.  My preference is to invest in index funds or ETF’s, typically from Vanguard because it is a non-for-profit and it has low fees.  I don’t have the time to research stocks or bonds, so index funds are the right choice for me.  This style of investing is also known as the “Lazy Portfolio”.  I’m not sure who coined the term, but there is a lot out there on this style of investing.  I found this wiki article this morning on Lazy Portfolios:

(http://www.bogleheads.org/wiki/Lazy_Portfolios)

They can get complicated, but to get started all you need are two or three funds or ETF’s.  If I were starting today, I would go with Vanguards Total World Stock Index and a Vanguard Total Bond Market Index.  So that’s what you buy, and here are some thoughts on allocation.  There was an article in the Wall Street Journal on owning a portfolio of 80% equities and 20% bonds vs. owning 50% equities and 50% bonds.  The 80/20 outperformed the 50/50 portfolio in an up market, but not by much.  The 50/50 is less risk.  Another way that’s easy to remember is your age minus 100.  So If I’m 35, then that’s 35% bonds and 65% equities.  This comes down to your risk tolerance, and bonds are viewed as less risky than stocks.  I’m leaning towards being more risk adverse.  There’s nothing like having money when you need it. 

Dollar Cost Averaging is a method for getting your money invested.  For example, you take $1,200 in January and invest $100 per month for the full year in the same ETF.  What you’re done is acquired the EFT at its average price for that year.  This method removes some risk by letting you buy more shares when the EFT drops in value and buy fewer shares when it increases in value.  Most 401k’s and other qualified retirement plans use this method, investing money at each pay period over the year.  It removes the concern over market timing: the “am I buying at the right time” concern.  This is a long term investing strategy, which is why it is good to have some cash saved for immediate needs.

In sum, buy index funds, split the money 50/50 between stocks and bonds (for simplicity), and invest evenly over a long-term time horizon.

How do you Save?

I think of savings in two ways: forced and unforced.  Forced is participating in the 401k. When I get my paycheck, the amount going into my 401k is already gone.  I have to live on what’s remaining.  It’s kind of like the Social Security tax in that it’s taken out of my check automatically so I don’t have to worry about paying it later.  I know that I could get money out of my 401k if I really needed it, but it is fraught with a strict rules and penalties.  There’s not a good enough reason to touch that money, not a house, not an emergency.  I’d consider going BK first.  Cash is king, and I can rebuild my credit later.

Unforced savings is the difficult one because you have more discretion.  This is the one where you must set aside some amount no matter how small.  If it’s $20 a month, good.  That’s a start.  Once you start, savings can become like shopping.  You want more, so you finds ways to put more away by living on less.  Direct deposit can help here.  Have the payroll folks send the majority of your paycheck to your checking account and a slice to your savings account.  It’s an easy way to turn unforced savings into pseudo forced savings. 

I read and heard a lot on how to start a savings strategy.  Have 6 months living expenses in cash, have a 401k, have a taxable investment account, have a Roth or 529; in other words, have a lot of money already saved.  After all that, getting to a savings goal felt like too much.  My solution; start small.

I needed a gimmick.  I’d take $100 from my paycheck and put $50 in my savings account and send $50 to E*Trade.  This did two things.  It got me started on two of the recommended saving tools, and it added an extra layer between my spending habits and that cash.  Everyone dips into savings, so I wanted to divide my accessible savings into to buckets: easy to get to and harder to get to.  Over time, I built in rules on how I would use these two savings buckets.  Over time, you can build your own rules.  The goal now is get some amount of money into savings.  Use your greed to help it grow.  Think of it as leveraging one of your vices.

If fear is a good motivator for you then read the last paragraph.  If not, then it is time to have fun doing something else.

Think about things in life as inevitabilities.  You will be hospitalized.  You will lose your job.  You will get in a car accident.  These things happen to all of us, but we don’t think about them and we don’t plan for them.  They’re coming, and savings can help you deal with all of them.  Money is not the answer, but it does grease the wheels.

Getting Started

So let’s say you want to start a budget, but you’re not sure how to begin.  Well, I won’t try to tell you how to set up a budget up because that is easy to look up online.  Just google budget.  The real obstacle is the will to do it.  My advice here is to start simple and get something done.  First drafts are great.  Getting something done is an accomplishment, and accomplishments make anyone feel good.

Simple is beautiful.  Simple is efficient.  Simple is manageable.  A kitchen knife works great.  It does what it is supposed to do, nothing more.  It works so well everyone has one.  Think about your budget in those terms.  It should be simple, and everyone should have one. 

Monthly Budget
Income	$2,500
Expenses:
Rent	$750
Power	$100
Gas	$45
Water	$30
Internet	$50
Cable	$100
Insurance	$135
Car Payment	$300
Credit Card	$500
ATM	$300
Cell Phone	$150
Total Exp.	$2,460
Savings	$40

Done. 

The numbers are just for illustrative purposes, but you get the point.  Over time, you can add to the budget, making it fit your needs.  My budget looks nothing like this, but this is how I started.  You’ve got to put a box around your income and expenses.  Once you understand it, you can start to control it.  


The last thing I say about this is that inspiration is temporary.  If you want to create a budget, do it right now.  If you wait, it probably won't get done.  As I've said before, this is not my insight; I took it from a book, Rework, by Jason Fried and David Heinemier Hansson.  I didn't even find the book on my own.  It was lent to me.

Money Freedom

First off I should say that I'm not a financial planner, and this blog really isn't for advice.  I wanted to get these thoughts out of my head.  Most of my thoughts aren't mine; they are an amalgamation of everything I've read from experts and pundits and journalists.  Realistically, they are an amalgamation of everything that I've read that I've agreed with.

For me, financial planning starts with a budget, a simple total-money-in, total-money-out budget.  I put my budget in MS Excel, but it could be in your head, on paper, in Quicken, on Mint.com, whatever.  If you don't have a budget, put one together.

When I want to buy something my budget gets in my way.  I have to think, and I can't impulse buy.  I wish I had enough money to buy everything I wanted at any time.  That would be great.  My budget doesn't pay off now, but it pays off later.  It pays off when I have savings, it pays off when I have a 529 plan already for my 9 month old, it pays off when my wife and I both have Roth IRA's to pass on to our heirs, it pays when my 401k is on track to be enough to live on when we retire.  It pays off when I don't buy things I don't need.

I've bought a lot of nice stuff.  It didn't really make me happy; it kind of wore off after awhile.  Sometimes it made me feel more important or part of the crowd.  It was also not real, and deep down I knew it.  I'm most happy when I'm in shape, playing with my kid, when I'm eating good food, when I'm laughing, when I'm thinking of jokes to tell my wife and friends.  In other words, I shouldn't buy things for happiness or as a cure for boredom.  I know this, but I forget it too, then I remember it--usually after I regret spending too much.

That's the best thing about my budget.  I can always get back on budget, and since I have savings I can get off the budget to get things like new dining room chairs.  I say new, but we didn't have old dining room chairs.  We just had to stop eating dinner in front of the TV.

I'm not a hard core penny pincher or coupon clipper.  I like things on sale, but I'm more interested in value and utility.  I use my budget to force myself to make good choices.  The things I buy should matter and not be simply more stuff.

So, start with a budget, and start thinking about what it means to save, invest and spend for you.